Redistribution,state trading enterprises and ‘politically optimal’ tariffs

State trading enterprises (STEs) are widely used and can be viewed as instruments of trade policy. We analyse two aspects: the first is their potential trade distorting effect; the second is how they modify the case for the ‘politically optimal’ tariff. We show that the STE can reduce the need for a tariff designed for domestic redistribution. This result introduces some ambiguity about how STEs are interpreted: from a multilateralist perspective, they should be dealt with in the same way as other non‐tariff barriers; from a nationalistic perspective, they can reduce the need for ‘politically optimal.’     

Does free trade promote environmental technology transfer?

We investigate how environmental and trade policies affect the transfer of environmental technology in a two-country model with global pollution. By comparing free trade and tariff policy with or without commitment, the following results are obtained. First, firms avoid the implementation of environmental tax by contracting technological transfer. Second, there is a case in which free trade is preferable to a tariff policy for both countries when there is no commitment to a tariff level. Third, free trade is not Pareto-preferred to a tariff policy when there is a commitment.     

Measuring China’s trade liberalization: A generalized measure of trade restrictiveness index

Neither simple average nor import-weighted average tariff indexes are ideal measures of tariff barriers. In this paper, we propose a generalized trade restrictiveness index (GTRI) that extends Feenstra’s (1995) tariff restrictiveness index (TRI) by relaxing the crucial assumption of a small open economy. We show that the GTRI can be measured using import tariffs, import shares, and the corresponding import and foreign export elasticities. We then apply the GTRI to examine how trade restrictiveness has evolved in China from 1997 to 2008, the period in which China entered the WTO. The GTRI indicates a higher level of protection than simple and import-weighted averages, but lower than the TRI. We further show a negative correlation between tariffs and product export supply elasticity, indicating that strategic trade policy was being pursued prior to China’s WTO accession. Finally, we calculate the welfare loss and terms-of-trade gain due to tariff protection. The overall tariff pass-through increases from around 28% to almost 47% because of the WTO.     

Tariffs, licensing and market structure

This paper challenges the conventional wisdom that exclusive owners of an advanced technology are always better off when producing as a monopolist than when competing against another firm. Competition against a less-efficient firm weakens the power that a host country can exert on the incumbent in the form of its tariff policy. We show that this gives a motive for a monopolist to license its technology to another foreign firm. A host country gains more from increased competition if it can induce the foreign incumbent to transfer technology to the host country firm. We show that the host country can do so by tariff commitment. We also discuss the implications of bargaining under licensing and Bertrand competition in the product market. Hence, this paper qualifies and extends the recent work of Kabiraj and Marjit [Protecting consumers through protection: The role of tariff-induced technology transfer. European Economic Review 47, 113-124].     

Trade policy and mixed enterprises

Abstract .  This paper demonstrates that the degree of state ownership affects neither the level of socially optimal activities nor welfare if the government chooses optimal trade policy instruments. In the case of rivalry in the home market, the optimal import tariff is independent of the degree of state ownership, and the optimal production subsidy decreases with state ownership if the optimal tariff is positive. For the case of Cournot rivalry in a third market, the optimal export subsidy increases with state ownership, while in the case of Bertrand rivalry with differentiated products, the optimal export tax increases with state ownership.     

Second-best trade policies in Cournot oligopoly

In this paper we study the optimal import policy in an oligopolistic market with a given number of quantity-setting firms. In the absence of fixed costs, we show that if the policy instrument is an import quota, the optimal policy is either free trade or autarky, while if the instrument is a tariff the optimal policy is neither free trade nor autarky. In the case of fixed costs, we show that contrary to the traditional protectionist argument, a restrictive import policy might increase domestic welfare by increasing domestic consumers' surplus, instead of increasing domestic profits.     

Trade policy and quality leadership in transition economies

Trade policy and quality leadership in transition economies are analyzed in a duopoly model of trade and vertical product differentiation. We first show that the incidence of trade liberalization is sensitive to whether firms in transition economies are producers of low or high quality. Second, we find that neither free trade nor the absence of a domestic subsidy are optimal: Both a tariff and a subsidy increase price competition and while the former extracts foreign rents the latter results in quality upgrading. Third, there exists a rationale for a government to commit to a socially optimal policy to induce quality leadership by the domestic firm when cost asymmetries are low. Finally, we establish an equivalence result between the effects of long-run exchange rate changes and those of trade policy on price competition (but not on social welfare).     

Tariff induced licensing contracts,consumers’ surplus and welfare

We construct a duopolistic trade model with technology transfer and consider two-part tariff licensing contracts. We show that a tariff on foreign products can influence the licensing strategy of the foreign firm. There is a trade-off between a tariff and a royalty license in affecting the product price. We show in particular that a tariff can be chosen so as to induce fee licensing and maximize both consumers’ surplus and domestic welfare. This resolves the so-called conflict between these two objectives in respect of the choice of a tariff. The paper provides a number of testable hypothesis.     

The MFN clause,welfare, and multilateral cooperation between countries of unequal size

This paper analyzes MFN in a “competing exporters” model of trade between three countries with unequal endowments and shows that MFN yields higher aggregate welfare than tariff discrimination even as it makes low income countries worse off. Furthermore, in a repeated game of tariff cooperation, multilateral free trade is easier to sustain under MFN punishments relative to discriminatory ones. This conclusion holds even when tariff discrimination takes the form of bilateral trade agreements. Overall, the analysis shows that from the viewpoint of low income countries, MFN and multilateral tariff cooperation are complementary in nature.     

Tariffs and privatization policy in a bilateral trade with corporate social responsibility

Corporate social responsibility (CSR) has become a global business strategy and thus it provides significant welfare implications for designing optimal policies. This paper investigates the impact of CSR on policy interaction between tariffs and privatization in an international bilateral trade model. We find that CSR is closely related to the government's policy decisions on tariffs. In particular, we find that the strategic tariff for increasing domestic welfare is always higher (lower) than the efficient tariff for improving global welfare when the degree of CSR is low (high). We also show that a privatization policy raises tariff and worsens (improves) domestic welfare when the degree of CSR is low (high). Finally, we demonstrate that both countries choose a nationalization policy even though the privatization policy is globally optimal when the degree of CSR is high.     

A proposal for social pricing of water supply in Côte d'Ivoire

We consider the design of a nonlinear social tariff for residential water in Côte d'Ivoire, which is a case of a monopolistic private operator supplying a population of heterogeneous consumers. The proposed optimal tariff includes an initial “social” block with a low unit price, and higher consumption blocks with a monopoly pricing rule. This optimal nonlinear tariff is calibrated using econometric estimates of a panel-data residential water demand equation. Welfare changes associated with moving from the actual tariff to approximations of the optimal pricing system are computed under different tariff scenarios. We find that gains in consumer welfare would outweigh losses in producer surplus in a majority of Ivorian local communities.     

Trade imbalance and the endogenous optimal tariff

Endogenous tariff literatures reveal empirically that trade imbalance is negatively related with import tariff, this article gives a theoretical evidence and explanation to support this finding with the methodology of multi-country numerical general equilibrium modelling and simulation. We explore how optimal tariff changes after trade imbalance is introduced, and find that optimal tariffs decrease substantially, either for surplus or deficit countries, when imbalance is considered. Specifically, when the imbalance is modelled in endogenous monetary and inside-money structures, the optimal tariffs decrease by 26% globally on average. Our results suggest that the deepening trade imbalance is beneficial to the global trade liberalization due to its driving tariffs down.     

Tariffs and the adoption of clean technology under asymmetric information

Abstract.  This paper examines the effect of a tariff on the decision of a foreign monopolist to adopt 'clean' technology, which reduces the flow of a negative cross-border externality. The clean technology increases the marginal cost of production relative to the dirty technology, but only the firm knows the extent of the increase. Under complete information, despite its protectionist motivation, the importing country's optimal tariff induces the firm to adopt the clean technology if and only if it is globally efficient to do so. Under incomplete information, this efficiency property is disrupted, and the firm biases its choice in favour of dirty technology. JEL classification: F13, F18     

DOMESTIC COMPETITION POLICY AND TARIFF POLICY COMPARED*

M. Yano and F. Dei have demonstrated that, by controlling the degree of competition in a non‐tradables market (competition policy), a country can influence the terms of trade so as to increase its welfare, relative to free trade. Using their model, this study compares the extent of this effect with that of a tariff policy. It demonstrates that a competition policy can achieve a higher utility than a tariff policy if tariff rates are at levels currently tolerated in the real world. This demonstrates that domestic competition policy may play an important role as a substitute for tariff policy.     

The trade distorting effect of state trading enterprises in importing countries

This paper focuses on the potential trade distorting effect of state trading enterprises, an issue that is likely to receive greater attention than hitherto in the context of the current agricultural negotiations in the WTO. Although state trading enterprises can arise in both exporting and importing countries, the emphasis here is on the importing country case. Our results show that state trading enterprises do distort trade, though the nature of the distortion (i.e., whether it is equivalent to an import tariff or import subsidy) depends on the nature of exclusive rights bestowed by government on the state enterprise. We also consider state trading enterprises in both developed and developing economies, the main difference being the nature of the government's pay-off function. The theoretical framework allows us to derive the tariff equivalent effects for various types of STEs, the results suggesting that the trade distorting effect is likely to vary considerably dependent on the type of STE that arises in particular circumstances.     

Tariffs,Quotas, and Forward Contracts under Asymmetric Information*

We consider optimal trade policy for a large country with private information. We show that the optimal tariff leads to a signaling equilibrium with higher tariffs and lower welfare than under complete information, whereas the optimal import quota replicates the complete information equilibrium and thus is superior to the tariff. We also show that, with the tariff, the country may be better off being uninformed. Finally, we show that if the importing nation cannot commit to its tariff, the use of futures contracts together with the dynamically consistent tariff leads to the same equilibrium as under complete information with commitment.     

Tariff escalation and invasive species damages

We investigate the interface between trade and damages from invasive species (IS), focusing on escalation in tariffs between raw-input and processed-good markets, and its implication for IS-based damages. The current tariff escalation in processed agro-forestry products motivates our analysis. Tariff escalation exacerbates the likelihood of IS introduction by biasing trade flows towards increased trade of primary commodity flows and against processed-product trade. We show that a reduction of tariff escalation, by lowering the tariff on processed goods increases allocative efficiency and reduces IS-based damages, a win-win situation. We also identify policy menus for trade reforms involving tariffs on both raw input and processed goods leading to win-win situations.     

The Loss from Trade under International Cournot Oligopoly with Cost Asymmetry

This paper examines the efficiency and welfare effects of intra‐industry trade in the presence of imperfect competition and heterogeneous technologies. We show that when a Southern country has a relatively less concentrated industry and faces low demand, the output of the Northern country may contract after initiating trade. Production inefficiencies can outweigh the gain effected by trade‐induced competition and lower price in trade, resulting in a net loss in the global welfare. In some circumstances, voluntary technology transfer, managed trade through VERs, or the introduction of a tariff can improve both trading partners' welfare.     

Trade liberalization, antidumping, and safeguards: Evidence from India's tariff reform

This paper is the first to use product-level data to examine empirically whether countries use antidumping and safeguard exceptions to unwind commitments to lower tariffs in the face of domestic political-economic pressure. We focus on the case of India, a country that underwent a major exogenous tariff reform program in the early 1990s and subsequently initiated substantial use of safeguard and antidumping import restrictions. We first estimate structural determinants of India's import protection using the Grossman and Helpman (1994) model and provide evidence from its pre-reform tariff data of 1990 that is consistent with the theory. We then re-estimate the model on the Indian tariff data after the trade liberalization is complete and find that the model no longer fits, a result consistent with theory and evidence provided in other settings that India's 1991-1992 IMF arrangement can be interpreted as resulting in an exogenous shock to India's tariff policy. However, when we re-estimate the model on data from 2000-2002 that more completely reflects India's cross-product variation in import protection by including both its post-reform tariffs and its additional non-tariff barriers of antidumping and safeguard import protection, the significance of the Grossman and Helpman model determinant estimates is restored. We interpret these combined results as evidence that India unwound its commitment to reduce tariffs through use of antidumping and safeguard protection in the face of political-economic pressure. The estimates are also economically important and provide one explanation for separate results in the literature that the magnitude of import reduction associated with India's use of antidumping is similar to the initial import expansion associated with its tariff reform. Finally, we interpret the implications of our results for the burgeoning research literature examining the effects of liberalization on India's micro-level development.     

Tariff evasion and rules of origin violations under the Canada‐U.S. Free Trade Agreement

Abstract Using product‐level data on trade between Canada and the U.S., this paper presents evidence of tariff evasion and violation of the rules of origin occurring under the Canada‐U.S. Free Trade Agreement (CUSFTA). It shows that more imports go unreported at the destination country when tariffs are higher. Consistent with the tariff evasion hypothesis, this result implies that the trade creation effect of a free trade agreement may in fact be due to less underreporting. Further, this paper shows that the larger Canadian tariff preference margin for the U.S. is associated with more goods originating in third countries being transshipped through the U.S. territory for re‐export. The preference margin is also positively correlated with the value of excess imports from the U.S., which qualify for preferential treatment. Both results suggest the presence of persistent violations of CUSFTA’s rules of origin.